Student Loan Borrowers Advised: Read The Fine Print
(NAPSI)-The amount Americans borrow for college through
federal student loan programs has nearly tripled over the past decade. With annual student
loan borrowing levels surpassing $35 billion dollars, any provision that reduces the cost
of repaying college debt would appear to offer families welcome financial relief. Many
student financial aid experts, however, warn that a Clinton administration initiative that
promises reduced student loan interest rates for some college graduates could actually
increase total borrowing costs for hundreds of thousands of others.
Student aid experts caution that many student loan borrowers
who accept the administration's offer could unwittingly end up locking in the
highest-possible student loan interest rates, foregoing potentially lower interest rates
in the future, and passing up more valuable interest-saving benefits offered by private
lenders.
"We are advising student loan borrowers to read the fine
print and proceed with caution," said Shelly Repp, general counsel for the National
Council of Higher Education Loan Programs.
On Aug. 10, President Clinton announced that student loan
borrowers who consolidate their loans in the federal government's direct loan program
would receive an 0.8 percentage-point interest rate reduction. Borrowers who make their
first 12 consolidation loan payments within six days of the due date retain the discount
for the remainder of the repayment period.
Critics of the plan note that the federal government's own
estimates indicate some 77 percent of these student loan borrowers will fail to make their
first 12 payments on time and lose the discount. Because current student loan interest
rates are at or near the maximum levels set by law, these borrowers will end up locking in
the highest-possible student loan interest rates for the repayment period on their
fixed-rate consolidation loan, a term of up to 30 years. Based on the administration's
estimates, more than 300,000 borrowers with college loans could get stuck with higher
interest rates.
More troubling, these borrowers will likely forego lower
student loan interest rates in the future. The Congressional Budget Office (CBO) estimates
that interest rates on variable-rate student loans will fall from the current rate of 8.19
percent to 7.2 percent by 2005. Borrowers who lock in the current high student loan rates
through a fixed-rate consolidation loan will miss the opportunity to enjoy these lower
rates in the future. According to one analysis, a borrower who consolidates $25,000 and
loses the 0.8-percentage-point discount would forego nearly $200 in savings if the lower
interest rates forecast by CBO come to pass. The additional interest costs will be much
larger for those borrowers who elect an extended repayment term, which the majority of
consolidation borrowers choose.
In addition, student aid experts advise borrowers to check if
they qualify for potentially more valuable borrower benefit plans offered by private
lenders. Many lenders offer interest rate reduction options that typically provide a
2-percentage-point reduction in the interest rate for borrowers who make their first 36 to
48 monthly payments on time. A graduate who qualifies for a lender benefit program on
$25,000 in student loans would save $345 more than a borrower who qualifies for the direct
consolidation loan discount and repays an equal amount over the same 10-year period.
"Many borrowers may find that consolidating their loans
in the government's program is not in their best interest," Repp said.
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